FEATURE ARTICLE, MARCH 2009

LEGAL SURVEY

Larry Petrowski is a partner in the Phoenix office of Stinson Morrison Hecker:

1) What commercial real estate property type do you specialize in?

Our firm works with all commercial real estate sectors and property types, including retail, office, industrial and mixed-use.

2) Are you seeing any changes in leasing activity in your market with the economy in its current state?

Leasing is off substantially, with a drop off in lease renewals and an increase in defaults and renegotiations. To avoid losing tenants, landlords are renegotiating rental rates, offering more free rent (with more free rent per year of lease term being offered now than a year ago), more tenant improvement dollars and early termination rights. In the office market, there is increased flexibility in choosing locations. With multiple possibilities on the table and growing tenant fear of making commitments in an uncertain economic climate, lease negotiations are taking longer.

3) How are distressed properties changing leases and the leasing climate?

Landlords with distressed properties are attempting to limit cash out of pocket and attract tenants with low rates and other concessions, but lenders are playing a more active role in approving lease terms, and lengthier negotiations are often the result. Two results are an increased tendency by lenders to consider appointment of a receiver to better manage properties and protect their security, and an increased tendency by borrowers to resort to bankruptcy protection.

4) Is you firm dealing with more loan workouts?

In those instances of default or imminent default in which lenders are willing to negotiate, borrowers are seeking modifications ranging from a decrease in the principal balance outstanding, which is rarely agreed to, to a change from an amortizing to an interest-only loan or a decrease in the interest rate and/or extension of the maturity, which are more commonly given. Lenders, on the other hand, frequently require payment of a fee to modify loan terms or to forbear from exercising remedies.

5) What’s a new major legal issue that’s surfaced in your market recently?

One issue of growing interest is the willingness of brokers to advise lenders of the value of properties that they are marketing, a factor that threatens brokers with potential increasing liability as the volume of commercial loans rolling over in the next 2 years grows.

Dana Schiffman is a partner  in the San Diego office of Allen Matkins:

1) What commercial real estate property type do you specialize in?

Retail but my practice is broad based within all types of commercial real estate.

2) Are you seeing any changes in leasing activity in your market with the economy in its current state?

Yes — far fewer new leases and an increase in number of lease modifications for the purpose of restructuring rent. Also, I have seen recent evidence of tenants exercising termination rights based on failure to meet a gross sales threshold. Consistent with that, many lease deals in the pipeline are not getting completed due to the tenant’s withdrawal.

3) How are distressed properties changing leases and the leasing climate?

Landlords are apt to spend less time on secondary issues and are focusing what leverage they have on the primary issues.

4) Is you firm dealing with more loan workouts?

We are dealing with more loan workouts. One year ago there were few if any modifications and currently there are a significant and growing number of such matters, but the upsurge has not been dramatic/obviously attention getting. There is a definite increase in the number of instances wherein clients (lender or borrower) are seeking a better understanding of their remedies and exposures under the loan documents.
5) What’s a new major legal issue that’s surfaced in your market recently?

I am not a land-use attorney but I believe water supply assessment as a part of the entitlement process is a major new issue for local development. In the shopping center/retail arena, there is no obvious new major legal issue.

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